Buying a home is by far the largest and most exciting purchase for most of us. It’s likely an important decision, so make sure you research the real estate market for the best price available and arrange your mortgage accordingly. When selecting a mortgage, interest fees or service charges are not the only things to look into. In this guide, we will discuss the types of mortgages to help you choose one that matches your financial goals.
Before you apply for a mortgage, there are several steps you need to take to prepare yourself mentally and financially for a purchase.
- Moneylenders analyze your debt-to-income ratio and the debt you already have to give. The general rule is that if your monthly debt and mortgage payment exceed 43% of your monthly income, difficulties might arise in processing the home loan.
- A better credit score always gets you the best interest rates on mortgages. You can always improve your credit score by resolving errors on your credit reports and paying the credit card debt on time.
- Analyze your budget as most moneylenders might want you to keep at least two months of reserves in the bank.
- When you are done managing your credit scores and debts, get a preapproval for a mortgage to know exactly where you stand financially.
The steps mentioned above will undoubtedly put you in a position to financially make a better decision. Without further ado, let’s take a look at several common types of mortgages available out there.
Private banks, firms, and credit unions process conventional loans for homes that are not secured by a government agency. The amount approved directly depends on your monthly income, down payment guidelines, and loan limits. When compared to government-backed loans, conventional mortgages require a higher credit score to be able to approve the loan.
When you have a credit score higher than 740, the interest rates are lowered by the lender significantly. A 20% down payment is also required to get the best rates possible. However, for a down payment of less than 20%, you might have to pay for private mortgage insurance too. The loan limits are set by the Federal Housing and Finance Administration, while the down payment guidelines are proposed by the lender.
These home loans are approved by various government agencies that have varying and unique qualification rules for each one. Government-insured mortgages are the best choice for low-income families with flexible options for down payment and relatively easy qualification criteria. With a plethora of options, choosing one type of mortgage becomes a daunting task. To ease things up, financial experts at advise that comparing mortgage rates and their rules greatly helps in making the right choice. Doing a side-by-side comparison makes the available options crystal clear, ultimately leading to a better financial decision.
Federal Housing Administration Loans
As the name suggests, they are guaranteed by the federal housing administration that accepts individuals with a relatively lower credit score and the lowest down payment when compared to other types of mortgages. With a credit score of 580 and a down payment of 3.5%, FHA loans can be easily procured when compared to conventional or other types of mortgages. However, these loans can only be utilized for your primary residence and require private mortgage insurance to qualify.
When buying a luxury home, a jumbo mortgage can cover the price for you. These loans fall beyond the limits set up by government loan regulators and have stringent qualification rules. While you get higher borrowing limits and competitive interest rates, the asset requirements to qualify for the home loan also increase.
Veterans Affairs Loans
VA loans are offered to individuals serving the United States Army, retired veterans, or a related family member. The department of veteran affairs mediates these loans. While there are no limits on the amount you can borrow, the approved amount always depends on the VA department. If you decide to make a home purchase that is under their set loan limits, you don’t need to pay any down payment or sign up for private mortgage insurance (PMI). The homes bought with the loan should always be a primary residence for the individual or their spouse.
To apply for a VA loan, you must get a certificate of eligibility from an institution offering VA-backed loans. A mortgage officer can also help you in exploring the procedure if you feel confused with the numbers.
The guide above hopefully gives you an idea of the type of mortgages that you apply to buy your new home. Don’t forget to discuss your goals with a mortgage officer to overcome difficulties in finances and homeownership. Lastly, research the real estate market to get the deal best suited for you.